Mortgage brokers dragging their heels on pay reform

Banks are on target to implement changes to how "tellers and sellers" are paid, as recommended in a comprehensive review — but mortgage brokers and other third parties are behind schedule, according to an update to be released on Tuesday.

Two years after the Australian Banking Association published a review of incentives and pay structures in banking, an update on progress from the report's author, Stephen Sedgwick, found the speed of change in the mortgage broking sector has left a lot to be desired.

Mr Sedgwick, a former public service commissioner, said although banks were moving at different speeds to implement the changes, they were on track to revise the pay structures of front-line staff such as tellers and call-centre employees by the review's deadline next year.

Stephen Sedgwick says "the industry has not responded satisfactorily" to his recommendations for mortgage broking. Louie Douvis

"Progress is generally slower and much more mixed in respect of recommendations that relate to third parties. Although substantial reforms to governance seem to be in prospect, changes to broker remuneration to date have been modest," Mr Sedgwick observed.

Mr Sedgwick's Retail Banking Remuneration Review made 21 recommendations, including to dump incentives directly related to sales, reduce financial measures as part of a balanced scorecard and reduce variable rewards to a small proportion of fixed pay.

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More controversially, the Sedgwick review also recommended banks revise their relationships with mortgage brokers, including that they stop paying volume bonuses, stop soft-dollar payments, stop increasing payments during sales campaigns and de-link payments from the size of loans.

Last month banking royal commissioner Kenneth Hayne, in his final report on misconduct in the banking, financial services and superannuation industry, said the recommendations should be implemented as soon as possible.

ABA chief executive Anna Bligh said the association had commissioned Mr Sedgwick to undertake a check-up on the sector's progress in the aftermath of Mr Hayne's scathing interim report, which found incentives were at the root of misconduct.

Ms Bligh said the review took submissions from the Financial Services Union, the Australian Securities and Investments Commission and the Australian Prudential Regulation Authority to ensure its independence and accuracy.

"This report has found banks have been on the front foot in implementing the Sedgwick reforms to bank staff pay, with many on or ahead of schedule in overhauling their salary structures," she said.

"Bonuses for bank staff are better balanced, focussing on what's best for the customer and excellent service rather than simply sales targets."

Mr Sedgwick noted the final Hayne report had supported not only the implementation of his 2017 recommendations but said "that their intent should be honoured".

He said the banks' moves to revise payments to aggregators and brokers to reflect only the drawn-down component of the loan was "a significant advancement" but did not go far enough.

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Soft-dollar payments had been substantially wound back, but little had been done to address the issue of payments such as commissions that were found to have driven poor behaviour.

"The industry has not responded satisfactorily to my recommendation to redesign the standard commission model to reduce the inherent risks. This observation applies equally to mortgage broking and to payments made to introducers and referrers," his update said.

Mr Sedgwick accepted mortgage brokers were in a difficult position, with the different policy solutions being put forward by the federal government and opposition left them "shooting at a moving target".

His review of progress said that "toxic practices like accelerators linked to sales had all but gone by late 2018" and he was confident they would be entirely removed by next year. However, the sector had had less success with removing leaderboards — which chart individuals' sales — with about half the banks surveyed still using them.

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James Frost writes about banking, funds management and superannuation. Based in Melbourne, James has been reporting on specialist business and finance topics for 15 years. Connect with James on Twitter. Email James at james.frost@afr.com.au